Breaking Bad – how blockchain is advancing transactional relationships
Blockchain technology is revolutionary
Blockchain technology is not only here but it’s likely to replace or improve a vast array of our modern technological platforms. Anticipated blockchain-led innovations stretch across many industries, however, the financial services industry is seeing the fastest growth in development of blockchain technology. The focus is on digitising 5 key concepts: identities, assets, currencies, wallets and record keeping.
So what is it? Blockchain is a decentralised database made up of 3 core-components: a digital ledger (database); a consensus mechanism to confirm new blocks (data); and a network of node operators (users). Once a block of data is recorded on the digital ledger, it’s extremely difficult to change or remove due to the decentralised nature of the database. Members of the blockchain all share copies of the ledger and transactions are added to the blockchain through a cryptographic consensus mechanism providing trust, decentralisation and near real-time settlement.
The first use of blockchain technology or (distributed ledger technology, DLT) was the creation of the Bitcoin cryptocurrency, what many people consider to be blockchain’s ‘killer application’. Bitcoin is an example of a permissionless blockchain conceived as the next generation of money by providing a peer-to-peer or decentralised protocol for transferring value over a network. Today Bitcoin is worth $158bn of the top 100 cryptocurrencies $400bn market cap although this should be regarded as a moving target due to the market uncertainty surrounding cryptocurrencies.
Use cases affecting the Banking sector
TEDx speaker and technology futurist Ian Khan highlights that Blockchain “is truly a mechanism to bring everyone to the highest degree of accountability.” In their famous HBR article published in 2017, the senior professors and researchers of the MIT Media Lab write “the blockchain will do to finance what the internet did to media” and predict that those who will thrive in the new financial order will be those who embrace it best. Here’s how it can be leveraged by financial institutions:
Reduction of fraud
Switching from proprietary centralised databases often running on aging IT infrastructures that are susceptible to hackers to blockchain would provide transparency, real-time fraud analysis and audit trails as evidence of regulatory compliance.
Collaboration on a global scale would be required to achieve this however, and security issues remain with blockchain technology in its development.
Know Your Customer (KYC) requests involve extensive repetition of work between banks and other institutions. The vision of using blockchain technology is for one institution to be able to verify a customer and add a digital signature of verification to a blockchain without storing their actual data (to avoid privacy concerns).
This would enable a network of institutions to see quickly that a customer has already been verified rather than going through the process each time. This could lead to substantial efficiency savings with smaller teams needed to maintain updates to customer data.
Goldman Sachs estimate their operational cost savings as $2.5bn with a further reduction in regulatory penalties of between $0.5bn and $2bn annually.
The key areas of development are derived through the reduction of a trade’s settlement time, the reduction in the cost of trades (by bypassing the middleman) and the creation of an immutable audit trail from origin to present owner.
This is achieved through the creation of a digital token for the corresponding asset and moving it in parallel with ownership of the assets being transferred.
Data privacy concerns can also be overcome through the use of permissioned blockchain technology that only gives users with the correct security keys access to encrypted data in a hierarchical structure.
Payment technology has already advanced significantly without taking blockchain technology into account. As a society, we become hugely more reliant on digital payment methods in the last decade.
Blockchain technology’s added value on top of these advancements is questioned by some but the drivers stem from the common themes of greater efficiency (especially with international transfers), lower costs and simpler provision of continuous services on a 24/7 basis.
Many hurdles remain about blockchain integration with current laws. For example, one of blockchain’s championed strengths, the immutable audit trail, challenges laws in jurisdictions that require data to be deleted if it’s no longer in use.
Food for thought
Blockchain technology has the potential to create a cheaper, more transparent and accessible market place. So it’s no surprise that the banking industry has so far led the way in research and development, however, everyone else is catching up and it likely won’t be long before we can’t remember a world without blockchain. It will support a magnitude of life-changing apps, including smart contracts, asset registering and other transactions far beyond financial and legal uses.
By way of sustainability-to bring up the #mediatreethinktank pet theme of 2018 -#newme(diatree)-, countries covered by the Amazon rainforest are attempting to combat ongoing ‘Biopiracy’ by building upon the Nagoya Protocol with blockchain technology. Each biological asset is set to be given a digital fingerprint in the Amazon Bank of Codes, this will help to track who is using which biological assets and create a fairer system for repatriation of profits to countries of origin. How’s that for creating impact and a better world?